This course will teach you the fundamentals of managerial accounting including how to navigate the financial and related information managers need to help them make decisions. You'll learn about cost behavior and cost allocation systems, how to conduct cost-volume-profit analysis, and how to determine if costs and benefits are relevant to your decisions.
By the end of this course, you will be able to:
- Describe different types of costs and how they are represented graphically
- Conduct cost-volume-profit analyses to answer questions around breaking even and generating profit
- Calculate and allocate overhead rates within both traditional and activity-based cost allocation systems
- Distinguish costs and benefits that are relevant from those that are irrelevant for a given management decision
- Determine a reasonable course of action, given the financial impact, for a given management decision

GG

AP

May 28, 2018

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A very intensive informative course.\n\nAna Pelayo.

From the lesson

COST ALLOCATION

After learning how to conduct cost-volume-profit analyses, we're ready to discuss cost allocation and the different types of systems we can use: traditional and activity-based. From there, we'll learn how to calculate overhead rates and allocate overhead within both types of systems.

Taught By

Luann J. Lynch

Almand R. Coleman Professor of Business Administration

Transcript

Recall our four steps to allocating overhead. Notice that the first two steps, determining the pools of overhead costs and the allocation base, involved choices that management makes. And the last two steps are purely mathematical calculations that result from the choices made in the first two steps. So there are two choices we must make in designing a cost system, pool and base. It's important to make good choices about cost pools and about allocation bases, because the estimated product or service cost that result from those choices in the cost system we will design, will be used in making management decisions. And we want to make sure we're making good, not poor, management decisions. So we need good cost estimates to do that. Now let's talk about those choices. Traditionally, manufacturing organizations that must allocate manufacturing overhead to products in compliance with financial accounting requirements, have used relatively simple allocation systems. Two common traditional choices are allocating overhead with a plantwide allocation rate, and then allocating overhead with a departmental allocation base. With a planetwide approach, you have just one cost pool that contains all the manufacturing overhead cost. And it's allocated using a relatively simple, volume-driven allocation base like direct labor or machine hours. Our T-shirt maker was an example of this type of allocation system. All 26,000 in manufacturing overhead cost were placed into that one cost pool and allocated to the T-shirts based on direct labor costs. With a departmental approach, you have a cost pool for each department that contains all the overhead costs in that department. And overhead in each department is allocated separately, but again, using a relatively simply allocation base. For companies that have more than one department in which overhead is consumed in different ways, this approach often leads to product costs that more accurately reflect the manufacturing process to make those products.

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